Clobbered by new tax code, blue states — and pundits — plot their revenge

By Andrea Riquier

Published: Jan 3, 2018 3:29 am ET

Might more states legalize marijuana, just to be able to tax it?

The tax-code overhaul arguably encourages local governments to game the system, just as corporations and individuals do.

The Republican tax overhaul may not do a great deal to boost overall economic growth — but it’s already having one stimulus effect. Call it the Full Employment Act for Tax Pundits.

Ever since the contours of the plan made clear that residents of high-tax states would take the biggest hits, a cottage industry devoted to strategizing blue-state tax work-arounds has emerged.

As a reminder, Americans for generations have been able to deduct the amounts paid for state and local income tax, as well as property tax, from their federally taxable income. But the new law caps that amount at $10,000, making it far more expensive to live and work in those places — and conceivably hurting local economies and housing markets.

The state governments in California, New York and New Jersey are all mulling legal challenges to the federal law. But they’re also eagerly hunting for ways to revamp their own tax systems to cushion the blow to their residents.

And they’re in luck. From Medium posts to academic papers, from Twitter chats to economic think tanks, tax strategery is proliferating.

As New York Gov. Andrew Cuomo put it just before Christmas, announcing a plan to encourage New Yorkers to prepay 2018 property taxes, “I say this is an economic civil war. Not North and South over the issue of slavery [but] an economic civil war pitting red states against blue states.”

Here’s a roundup of a few of the suggestions that have attracted attention:

• Racing the clock: Prepaying taxes that would otherwise have been due in 2018 was a popular scheme that emerged, and was endorsed by state, county and municipal officials from New York and New Jersey to Illinois to California, only to evolve out of existence when the tax overhaul took effect on New Year’s Day. (It’s worth noting that some early versions of the Republican overhaul favored property taxes within the state and local framework, leading some analysts to propose states shift to collecting property taxes in lieu of local income taxes.)

• State-run charity: The new law puts a cap on state and local income-tax deductions — but not charitable donations. If states set up charities to fund programs, taxpayers could donate money to those charities. They could then receive tax credits applicable to their state tax levy, while still taking advantage of the federal tax benefit.

• Payroll-tax shift: Alternately, states could make employers, not employees, responsible for remitting taxes on income. Currently, employees pay taxes on their earned income. States could set higher payroll taxes to replace that. Businesses would pay the full amount owed — and reduce employee wages by that amount. That would simplify the filing of personal taxes and provide corporations a tax benefit, since those taxes are still deductible for businesses.

It’s only fair to note that many conservatives say high-tax states should do more in their own backyards to get residents’ tax burdens down. But New Jersey’s Leonard Lance was particularly vocal among blue-state Republican House members in arguing that state and local taxes should have remained fully deductible, noting that reducing that deductibility meant the tax overhaul was picking winner and loser states, curtailing federalism by interfering in local decisions about levels of public-service provision, and effectively double taxing residents’ income.

Many Americans have made life plans based on the ability to deduct those taxes, a feature of the tax code for over a century.

Still, it’s not just the aggrieved elected officials in higher-tax states railing against the law. There are serious legal minds calling into question the legality of the distribution of the pain from this overhaul, possibly providing ammunition for court challenges, if those states should choose to file suit.